Market Demons

Conclusion

This week witnessed the US Fed holding rates unchanged amid subdued inflation with added positives in increased consumer spending etc. Dollar value dropped and gold increased on this news, surprisingly, because this provides Janet Yellen with motivation to hike sooner rather than later (boost for US$), and gold does not like lower inflation.

The US$ has been very weak and dropped to 93.00 at the start of a region of strong support from which it will likely rebound. A Dollar rally could extend to 200-Dema which is 5% higher than present levels, and this will also drop gold further down to its final 6 month cycle low below $1200.

The gold cycle indicates the sequence is ripe for a top with additional encouraging signals in metals and miners for further moves down to follow.

General equities continue to labour at new highs (or close to) indicating continued exhaustion with negative divergence and other bearish indications.

US$

The US$ has been very weak and dropped to 93.00 before closing at 93.11 in what appears to be the start of consolidation. The 93.00 level is the start of a massive region of support that stretches back 2½ years to the beginning of 2015, and there is much consensus now that, despite the extensive bearishness, the Dollar will likely rebound from these levels. A rebound up is also likely to extend to 200-Dema which is 5% higher than present levels, and this will also drop gold further down to its final 6 month cycle low below $1200.

However, we still need a confirmed bottom with the Dollar closing above 93.95 and above 10-Dema consecutively.

The long term US$ view is extremely bearish, having now penetrated the 1st stage decline target (red) in reaching the 2½ year long region of strong support (green) at a confluence with 200-Wema (blue). Support here is likely to generate a strong rebound before once again dropping to 2nd stage decline target and beyond to 3rd stage decline target.

Gold

The gold cycle has been peaking every 34-35 trading days, and it is now 37 days since the June $1,298 high. The sequence is ripe for a top, with the slow Stochastic above 80 and continued MACD negative divergence. This is supported by bearish candles this week in metals and miners indicating further downside to follow. However, we still need a confirmed top with a close below $1,253.90.

Silver

Silver is close to a top having increased to the short term resistance trendline on reducing volume, the slow Stochastic above 80 and continued MACD negative divergence. The cycle timing is also appropriate for a top.

US Miners

The GDX US miners increased to the short term resistance trendline and a close below $22.29 will indicate a top. The slow Stochastic and MACD are also bearish, indicating more downside to follow. An increase above the resistance trendline will invalidate this outlook for now.

DUST US miners bear index

The DUST index dropped to the support trendline and the cycle timing for a confirmed bottom seems very likely (blue circles). The slow Stochastic and MACD are also promising a rise from these levels. A drop below the support trendline will invalidate this outlook for now.

General equities

General equities continue to labour at new highs (or close to) as the Dow Jones ended the week at yet another new high (21830.31), inching up in total exhaustion, with strong negative divergence stretching back to Dec last year plus the slow Stochastic at 96 and due to drop. A powerful support line is at just below 21200 and this needs to be penetrated to generate a meaningful correction,

A word on Dow Theory which states that the market will reverse when Dow Transports are not in unison with Dow Industrials. Since 14 July 2017 the Dow Jones has inched up to Friday’s close by 0.89% (in 2 weeks), and the Dow Transports has dropped by 5.29%. This suggests all is not well.

Conclusion

The gold price continues to bounce up to the long term resistance line and closed this week at $1254.90 as it once again approaches resistance. The new bull market support line from the 8 year cycle low in Dec 2015 forms an equilateral triangle which must be breached as we now approach the apex. Many commentaries are suggesting resistance will be breached soon and some are suggesting the new bull market support will be breached, while some even suggest long term support will be reached (or breached) at prices below $1000.

Gold prospects remain positive as long as the new bull market support trendline holds.  The current rally, unfortunately,  is accompanied by an anaemic rally in miners lacking conviction with another decline in metals and miners expected before reaching a sustainable low. The marked drop in Dollar value is expected to rally soon and this will arrest the gold rally which should still drop to below $1200.

Continued weakness in the US$ has now reached the 1st stage decline target (closing the week at $93.68) en route to the final decline target. But in so doing has also reached a region of strong resistance increasing the likelihood of a meaningful bounce which could test 200-Dema.

General equities (Dow Jones Ind Ave) closed the week at new highs with most commentaries claiming yet more new highs with buy signal suggestions. The reality is however that the Dow is laboured and exhausted with strong divergence and reducing volumes.

US$

The US$ continues to drop closing the week at $93.68. All the indicators are pointing down although the cycle is excessively stretched and a short term bottom likely soon.

Continued weakness in the US$ has now reached the 1st stage decline target en route to the final decline target. But in so doing has also reached a region of strong resistance increasing the likelihood of a meaningful bounce which could test 200-Dema.

Gold

The long term gold chart, since the all-time high in Aug 2011, illustrates the powerful resistance (blue) and support (red) trendlines, and the new bull market support since the 8 year cycle low in Dec 2015 (green). Gold continues to reach resistance and closed this week at $1254.90 as it once again approaches resistance. The blue and green trendlines form an equilateral triangle which must be breached as we approach the apex.

Many commentaries are suggesting resistance will be breached soon and some are suggesting new bull market support (green) will be breached, while some even suggest long term support (red) will be reached (or breached) at prices below $1000.

Gold prospects remain positive as long as the new bull market support trendline holds.  The marked drop in Dollar value is expected to rally soon and this will arrest the gold rally which should still drop to below $1200.

Gold rallied strongly from a low of $1204 to close the week at $1254.90 punching through both 50-Dema and 200-Dema convincingly. This may extend towards $1260 or higher but the rebound is accompanied by an anaemic rally in miners lacking conviction with another decline in metals and miners expected before reaching a sustainable low below $1200.

Gold re-captured the higher ground above the quad-bottom support trendline and closed the week above both 50-Dema and 200-Dema. However the slow Stochastic is now above 80 and supports a price decline next together with the anaemic rally in miners. Consecutive closes above $1265 will invalidate our proposition.

US Miners

The GDX US miners closed up above 50-Dema and should encounter strong resistance between $22.40 – $22.80. The threat of penetrating support at $21 remains which will likely correspond with gold below $1200. An increase above the resistance trendline will invalidate our proposition.

DUST US miners bear index

The DUST chart illustrates the continued price drop supporting the gold rally.

General equities

General equities (Dow Jones Ind Ave) closed the week at new highs with most commentaries claiming yet more new highs with buy signal suggestions. The reality is however that the Dow is laboured and exhausted with strong divergence and reducing volumes.

Conclusion

Gold and silver are exhibiting powerful signs of resuming the bull market as all the impacting factors begin to apply their respective influence. The US$ continues to flounder with unmistakably bearish sentiment while precious metals rise to intra-week highs, still somewhat retarded by miners stuck in neutral.

Traditionally, July is always a weak spot in the precious metals and miners calendar, and this year is no different. But the extended Dollar weakness is beginning to propel gold higher into what could develop into a strong rally to $1250 or even higher. However, the extended Dollar weakness should rebound at some point soon and develop into a strong overdue rally of its own which will push gold and silver into their final decline before reaching the 6-month cycle low in August or early September.

US inflation declined to flat in June which reduced bond yields slightly which in turn boosted equities to new highs, although with continued low volume and signs of exhaustion.

US$

The US$ continues to flounder with unmistakably bearish sentiment although closing in on another cycle turning point which could induce a rally soon because the cycle is stretched. Consecutive closes above 10-Dema could initiate this in a rebound through the resistance trendline to test 200-Dema.

Janet Yellen testified to the US congress this week during which she sounded abnormally ‘dovish’ indicating that:

• the Fed does not need to raise rates that much further;
• inflation remains below the Fed’s target;
• she will not use ‘shrinking the Fed’s balance sheet’ (as promised at the June rate hike meeting) as a monetary tool, which means it won’t drain liquidity from the system;

Simply put, this all means the Yellen Fed is now finished with ‘tightening’, and that in turn means the US$ will continue to weaken. The attempted Dollar rally in the previous week petered and then closed this week at a new low of 94.93.

The Dollar is in long term decline having now reached close to the 1st stage target at 94.5 with the final decline target at 86.5. Despite this, expectation is that a major Dollar correction must nevertheless happen at some point soon which will propel gold to still lower lows before the bull market resumes.

Gold

Gold and silver are exhibiting powerful signs of resuming the bull market as all the impacting factors begin to apply their respective influence. The US$ continues to flounder with unmistakably bearish sentiment while precious metals rise to intra-week highs, and as the Dollar continues to drop it will lift gold into a stronger rally than it is currently enjoying.

That all sounds good for gold but miners are stuck in neutral with miners moving mostly sideways with no confirmed bounce or drop to support movement in either direction.

Traditionally, July is always a weak spot in the precious metals and miners calendar, and this year is no different. But the extended Dollar weakness is beginning to propel gold higher into what could develop into a strong rally to $1250 or even higher.  However, the extended Dollar weakness should rebound at some point soon and develop into a strong overdue rally of its own which will push gold and silver into their final decline before reaching the 6-month cycle low in August or early September.

Gold prices have been hitting resistance at 10-Dema and this was broken at the Friday close ahead of 10-Dema in a bullish Engulfing candle. This should ensure a useful rally higher.

Silver

Silver closed at 10-Dema also with a bullish Engulfing candle which should ensure a useful rally higher.

Gold / Silver Ratio

Gold increases slower than silver in a rising market and drops slower in a dropping market. This gives rise to a powerful indicator in the gold / silver ratio which therefore illustrates the price direction in the market.

Observe the similarities between this ratio after the 1980 gold peak (red) and after the 2011 gold peak (blue). We are now very close to a drop in the ratio from the long term resistance trendline, indicating a substantial increase in precious metal prices.

US Miners

The GDX US miners closed up above 20-Dema and should now continue the rally towards resistance at $23. The threat of penetrating support at $21 remains including ultimately to break the May $20.89 low before achieving a sustainable 6-month cycle bottom.

DUST US miners bear index

The DUST chart has rebounded strongly from resistance and the Star reversal candle at the top to close the week at 50-Dema, supporting the rally in gold.

General equities

US inflation declined to flat in June which reduced bond yields slightly during the week which in turn edged equities to new highs. The Dow Jones Ind Ave continues to exhibit signs of fatigue and exhaustion with negative divergence (MACD), declining volumes, and slow Stochastic above 80 and due for a drop. Nevertheless, the index may well continue higher as is its want in spite of the influencing factors to the contrary, such as confirmation of the interest rate cycle turning up.

Conclusion

The early 1980s was the greatest investment environment ever and the start of a bond bull market that has endured for more than 35 years. The interest rate cycle turned up in mid-2016 which is reflected in the bond market decline since, and as this gathers momentum it is gradually being factored into international stock markets as they continue off their peaks in what appears increasingly to resemble fatigue and exhaustion.

The Dow Jones Ind. Ave. broke down through the long term trendline up from the 2009 low point during Sep 2015 and since then has endured volume decline during breakouts to new highs. Since Feb this year the oscillators indicated negative divergence as the index enjoyed breakouts to further new highs, all the while enduring further volume declines. Exhaustion is setting in.

The US Dollar is in decline, having broken down through a recent consolidation base during a 6 months drop from the last peak at the start of 2017. It closed on Friday at 95.79 after a mild bounce but is still 1.85% from the previous peak at 97.60. It has also not impacted on 10-Dema and needs to bounce strenuously if the current decline is to be arrested.

Gold dropped down decisively through the quad bottom trendline and closed the week at $1209.70, now rapidly approaching the 6 month cycle low. Silver dropped more aggressively.

Bond Market

The early 1980s was the greatest investment environment ever and the start of a bond bull market that has endured for more than 35 years. The interest rate cycle turned up in mid-2016 which is reflected in the bond market decline since, and as this gathers momentum it is gradually being factored into international stock markets as they continue off their peaks in what appears increasingly to resemble fatigue and exhaustion.

The 10 year US Treasury yield chart illustrates the extent of the bond bull market which has extended 37 years to date, but with the interest rate cycle turning up in mid-2016 it is increasingly regarded as over. Interestingly, mid-2016 and mid-2012 form a bearish double bottom, and many other indications support this bearish view.

The German 10 year Treasury yield chart illustrates the cycle turn in Jul 2016, with the move down to negative yield (red) and positive yield (blue), with a prominent breakout this week. There is little doubt that the new normal is increased rates and lower bond and stock markets.

General Equities

 The Dow Jones Ind. Ave. broke down through the long term trendline up from the 2009 low point during Sep 2015 and since then has endured volume decline during breakouts to new highs. Since Feb this year the MACD indicated negative divergence as the index enjoyed breakouts to further new highs, all the while enduring further volume declines. The slow Stochastic is above 80 and falling. Fatigue and exhaustion is setting in.

The ultra short term 1 month chart illustrates the plethora of bearish candle signals together with the volume decline, all very negative.

US$

The US Dollar is in decline, having broken down through a recent consolidation base during a 6 months drop from the last peak at the start of 2017. It closed on Friday at 95.79 after a mild bounce but is still 1.85% from the previous peak at 97.60. It has also not impacted on 10-Dema and needs to bounce strenuously if the current decline is to be arrested.

The long term Dollar decline proposition to final support at 86.5 still holds good, whether it generates a short term bounce (mild or severe) or not.

Gold and silver

Gold dropped down decisively through the quad bottom trendline and closed the week at $1209.70, now rapidly approaching the 6 month cycle low. The target region for the drop is $1200, and it remains to be seen whether this is achieved or exceeded. Additional support data in the GDX miners and DUST bear index may assist in this.

Silver dropped more aggressively to close at $15.43, having penetrated support at $15.63. Reasonable evidence appears to provide support at this level (black). Although the oscillators are both trending down the slow Stochastic is close to a turning point up at 23.

US Miners

The GDX US miners dropped down below the previous low at $21.75 to the region of support at $21 which it held despite gold’s decisive penetration of the quad bottom trendline. This level may hold and provide some support to gold from here.

DUST US miners bear index

The DUST chart indicates a rise to resistance with a Star reversal candle evident at the top, similar to the previous top. This suggests a reversal adding support to a gold bottom.

Conclusion

The US$ appears to be in a hopeless position in declining for 6 months now with nearly everyone bearish. The extremely bearish sentiment is seemingly preventing a bottom which should nevertheless manifest because these conditions form bottoms and not tops. The paradox is however that during all this the gold price continues to drop down as well.

The gold price remains well below the $1298 double top and continues the decline into a 6-month cycle low. Breaking down through the 5-month quad bottom trendline will herald the final approach run, whilst failing to do so will result in an interim bounce. If gold breaks out above $1300 then this proposition is null and void with a new one in its place.

A new view of general equities has taken hold with the UK, EU, and Canada now indicating the potential for an interest rate hike following on behind the US, and this is beginning to trigger new market direction. All the major indicators continue to alert the potential for a major downturn in equities whilst the equities themselves continue to remain elevated. Crazy stuff!!!

US$

The US$ appears to be in a hopeless position in declining for 6 months now with nearly everyone bearish. This, in spite of rising rates, is presumably due to a deteriorating view of US economic prospects, plus Donald Trump’s continued requirement for a weaker Dollar. The extremely bearish sentiment is seemingly preventing a bottom which should nevertheless manifest because these conditions form bottoms and not tops. The paradox is however that during all this the gold price continues to drop down as well.

The Dollar broke down from its 6-week consolidation pattern and moved dramatically further from the 6-month resistance trendline. It is likely to bounce from long term support at the 1st stage decline target of 94.5 (see next).

In the long term the Dollar will decline in 2 stages:

• 1st Stage to the halfway mark at 94.5 (dotted blue) where it will encounter some resistance. It closed Friday very close at 95.42, providing some impetus to the likelihood of a short term bounce from 94.5;
• 2nd Stage to long term support at 86.5. It is this drop which will propel gold in due course;

Gold

The paradox at the moment is that during this Dollar weakness the gold price continues to drop down as well. Price remains well below the $1298 double top and continues the decline into a 6-month cycle low. Prices have dropped to the 5-month trendline and created a quad bottom and if it is breached it will herald the final approach run, whilst failing to do so will result in an interim bounce. If gold breaks out above $1300 then this proposition is null and void with a new one in its place.

A slightly longer term view of gold illustrates the position of the 5-month quad bottom support trendline in relation to the 8-year cycle low at Dec 2015 and the next low at Dec 2016, plus the likely current 6-month cycle low target at $1200.

Silver

The silver price rallied more than gold and actually touched 20-Dema, but should now decline back toward $16. The drop may exceed that of gold and move toward critical support at $15.63.

US Miners

The GDX US miners chart indicates a decline below the massive engulfing candle of last week which should drop further below the previous low at $21.75. Price may rally from support at $21 but if gold penetrates below the 5-month quad bottom trendline then GDX is likely to also penetrate support at $21.

DUST US miners bear index

The DUST chart indicates a rise above the massive engulfing candle of last week after an interim drop, which suggests a further increase supporting a further decline in gold. This reflects exactly the reciprocal situation to gold and gold miners, and therefore continues to support the gold 6-month cycle low proposition.

General Equities

A new view of general equities has taken hold with both the UK, EU, and Canada now indicating the potential for an interest rate hike following on behind the US, and this is beginning to trigger new market direction. StockCharts alerted short term sell signals to all 4 major US indices on Friday morning somewhat nullifying their earlier warning that the S+P500 : Gold ratio was about to break out. All the major indicators continue to alert the potential for a major downturn in equities whilst the equities themselves continue to remain elevated. Crazy stuff!!!

Speaking in London on 27 June Federal Reserve Chair Janet Yellen said, “Would I say there will never, ever be another financial crisis? You know probably that would be going too far, but I do think we are much safer, and I hope that it will not be in our lifetimes and I don’t believe it will be.”

Take solace from this if you must, but this is exactly the sort of sound, sober forecast economist Irving Fisher made on 3 September 1929 when he wrote in the New York Times, “Stocks have reached what looks like a permanently high plateau.”

The short term chart of the Dow Jones Ind Ave indicates the start of a market top which in turning down this week exhibits a number of bearish signals:

• The oscillators RSI (top) and MACD (bottom) illustrate negative divergence in trending down over the last 4 months against the Dow trending up – this usually results in price turning down further;
• The Dow downturn during the last 2 weeks includes a whole bundle of negative candles which usually results in price turning down further:
  • Harami candle to start;
  • Engulfing candle toward the end;
  • Harami Cross (Engulfing candle + Doji);
  • Doji at the end on Friday;

All this suggests strongly that a lower Dow is coming.

The long term chart of the S+P500 : Gold ratio illustrates the gold peak in Aug 2011 followed by higher general equities and lower gold prices to the multiple pronged flat top over the last 2 years (horizontal blue line). This prompted the forecast of an imminent breakout up through the horizontal resistance line (blue) which by definition meant yet higher equities and lower gold. The lower gold we might get in the short term (6-month cycle low) but the higher equities we will not get if the oscillators in the chart prove true.

The slow Stochastic is above 80 and will turn down, and the MACD illustrates a negative divergence with the ratio – which by definition will then turn down.